New report flashes a warning light over 401(k) account balances

By Jeanne Sahadi, CNN

New York (CNN) — The average balance in employer-sponsored savings plans last year was $112,572, well below the $141,542 recorded in 2021.

That’s according to the latest annual report, “How America Saves,” from investment firm Vanguard, which serves as record keeper for defined contribution plans that, combined, have nearly 5 million participants with a median age of 43. Such plans include 401(k)s and 403(b)s, as well as a much smaller universe of plans that employers simply put money into for employees and then employees direct how that money is invested.

“Vanguard participants’ average account balances decreased by 20% since year-end 2021, driven primarily by the decrease in equity and bond markets over the year,” according to the report.

The numbers look worse if you consider the median balance, which was just $27,376 last year, down from $35,345 in 2021. The median in some ways is a truer read on the state of employees’ retirement savings since it is the middle point — meaning half of accounts have higher balances, and half have lower ones.

Some participants tapped their retirement savings early — either through a withdrawal or a loan. Vanguard found that in plans where they had the option, 2.8% of participants made hardship withdrawals, the highest since 2018. Given last year’s economic headwinds, “the increase … may signal that some households faced additional financial stress,” Vanguard said, noting that about a third of hardship withdrawals were to avoid home foreclosure or eviction, and roughly another third were due to medical expenses.

Meanwhile, another 3.6% of participants made non-hardship withdrawals. And 12% borrowed money — an average of $10,500 — from their accounts.

Features that make building a nest egg easier

On the bright side, a lot of employers’ defined contribution plans now have features that make it easier for employees to save more.

For instance, Vanguard found that 95% of employers plans make contributions to their employees’ accounts. More than half offer a matching contribution — with the most typical match being 50 cents for every dollar an employee saves up to 6% of their pay.

But more than a third of employers (36%) offer not only a matching contribution but also a nonmatching contribution, meaning they put money into an account on behalf of eligible employees whether or not they are saving themselves. These often take the form of fixed- or variable-rate profit-sharing payments.

“Among plans with a nonmatching employer contribution, the average contribution was equivalent to 5.1% of pay; the median contribution, 4.1% of pay,” Vanguard noted.

Nearly 60% of 401(k) plans now have an auto enrollment feature, meaning employees are automatically enrolled in the plan and they have to actively opt out if they decide they don’t want to save. The most typical auto deferral rate is now set at 4% or higher. In other words, 4% of a person’s pay automatically will be taken, untaxed, and invested in their retirement savings account, where it will grow tax-deferred until it’s withdrawn in retirement.

And two-thirds of plans with auto enrollment also automatically increase an employee’s deferral rate annually.

The auto enrollment feature has helped boost overall participation in the plans Vanguard oversees. It noted that 83% of eligible employees were enrolled in their employer’s voluntary savings program last year, up 8 percentage points from a decade ago.

So how much are employees saving every year?

Certified financial planners will often recommend people start saving early in their careers, and if they can, they should set aside 12% to 15% a year of their income pre-tax.

But that is far more than many people save. Vanguard found that the average employee deferral rate was 7.4%, while the median was 6.4%. Just under a quarter of participants save more than 10% of their salary, Vanguard said.

Including what employers kick in, the average total contribution rate was 11.3%. The median was 10.6%.

And among participants who save below the recommended 12% to 15% range, Vanguard found that a fifth of them only need to boost their deferral rate by 1% to 3% of their pay to hit that target range.

Still, no matter how well designed a 401(k) plan may be, those who don’t make much money may be less likely to participate. The median income for plan participants in the Vanguard database was $82,000. But the median income of nonparticipants was just $42,000, meaning half of nonparticipants made less than that.

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